New News is good news, says mogul
Rupert Murdoch has challenged the investment community to trust that he can reinvigorate his financially shrinking print business using his innovative management flair.
The spruiking of the new News Corp to investors started in earnest this week. But it is a hard sell and the "trust me" routine shows the degree of difficulty he faces.
Murdoch and the CEO-elect of new News Corp, Robert Thomson, are trying to garner support for the company when it detaches from Murdoch's mothership (which houses the main television, cable and film businesses and will be renamed 21st Century Fox).
Murdoch faces the same problems as publishers around the world - declining profits thanks to the migration of readers and advertisers to digital platforms. The difference is that Murdoch is the only person creating a new listed entity housing these assets.
Investors don't mind separating the weak from the strong - indeed shareholders have made a lot of money since the split was announced based on the fact the combined value of both companies post-split should be worth more than News Corp is today.
But it's worth noting that many demergers are value-creating because the new companies formed are vulnerable to takeover. This won't be the case in either 21st Century Fox or News because Murdoch will be the majority shareholder in both. But it would be a bad look for Murdoch if the new News share price fell precipitously after separation.
There is great divergence of opinion on how the business will fare alone. Australian analysts that arguably know the business better have been reasonably supportive of the prospects of new News. Some take the view that the worst of revenue declines in print are almost over. That is probably optimistic.
There was lots of talk this week from Murdoch and management about paywalls and accessing additional revenue streams from existing businesses like Dow Jones and The Wall Street Journal but this is a work in progress.
What is within management's control is costs. And taking those out of new News will be a strong focus. Thomson described the future in terms of "relentless cost-cutting" in its US, UK and Australian newspapers, along with aggressive digital expansion.
At the very least taking out costs might limit the newspaper profit bleed and allow other assets in the business like Fox Sports, half of Foxtel, and realestate.com to more readily offset print declines.
Murdoch has been attempting to cushion the fall of the weaker company's share price by allocating $500 million to new News to buy its own shares on listing, thus supporting the share price.
This speaks volumes to Murdoch's concerns about how new News will be treated by investors.
There is plenty more cash in new News which most believe to be earmarked for acquisitions but could also be drawn down for share buybacks. Murdoch told investors this week he would be interested in buying more newspapers but said he would be limited by US media ownership laws in acquiring many American titles.
He has also got new News covered in the event that an opportunistic investor attempts to get the corporate newborn. He has imposed a poison pill that makes a takeover virtually impossible.
Despite his protests last year that the print assets were undervalued, the company has just announced a $US1.4 billion write-down of these assets, most of which was applied to the Australian print business. The move was based on a reduction in cash flows from these and the US print businesses.
In the US regulatory filing it said goodwill and intangible assets in the publishing segment continue to be at risk for impairment.
This dose of reality sits in stark contrast to the more bullish talk evident in this week's briefing to analysts about the prospects for reinvigorating the print businesses inside new News Corp. He implores investors in the new News to trust that he can grow this business in the same way as he did 30 years ago.
Murdoch admitted to having made "spectacular" mistakes but reminded them of his spectacular successes launching BSkyB and Fox News. It is true Murdoch has been a brilliant businessman but now in his 80s, replicating this success will be a herculean task.
The upside for new News could lie in how it invests the $2.6 billion wad of cash it has been allocated.
Buying old media assets at heavily discounted prices might be enticing but would be risky. Buying or developing digital businesses with a growth trajectory alongside traditional print titles is the most likely way the company will proceed.